The asymmetric adjustment of global imbalances: myth or fact?

We focus on the so-called "secular international problem" whereby the adjustment of current account imbalances purportedly falls entirely on the shoulders of deficit countries. Whereas this has continued to be an important point of contention since the Bretton Woods conference, the theoretical and empirical literature on this question is surprisingly small. We propose a stylised model to rationalise an asymmetric counter-cyclical policy reaction that is stronger for deficit countries. We then look at stylised facts around large current account adjustments (both deficits and surpluses) in advanced and emerging economies and zoom in on the fiscal policy reaction to external imbalances in panel regressions. Overall, we find surprisingly little evidence of more policy activism in deficit countries, at least outside of crisis situations. However, large surplus adjustments are less frequent and are associated with export compression, whereas deficit adjustments tend to accompanied by import contraction. This in turn suggests that a reduction in global imbalances would be trade-reducing.